Detroit prepares for bankruptcy as soon as Friday

Detroit may file for Chapter 9 bankruptcy protection as soon as Friday, the Detroit Free Press reported, setting up what would become the largest municipal insolvency in U.S. history.

The city has as much as $20 billion in debts and liabilities, dwarfing previous bankruptcy filings by other troubled cities and counties.

If Michigan Gov. Rick Snyder signs off on the filing, creditors will likely compete to maximize the amount of money they can recuperate from the city.

The news follows Detroit emergency manager Kevin Orr's June announcement of a new plan to restructure city debt and obligations. The proposed restructuring would cause investors to endure heavy losses, as the debt would be "unsecured" and not tied to any revenue streams.

"Pension boards, insurers, it's clear that if you're suing us, your response is 'no.' We still have other creditors we continue to have meetings with, other stakeholders who are trying to find a solution here. ... We have to have a city that can provide basic services to its 700,000 residents," an Orr spokesman told the newspaper.

Detroit on bankruptcy watch

If Detroit doesn't make a sweeping deal with creditors, it's expected to file for chapter 9 as early as this week. Alexandra Lebenthal, Lebenthal & Co., offers insight.

This week, two of the city's pensions funds, claiming to hold $9.2 billion in unfunded pension and retiree health care liabilities, filed suit in state court to prevent the slashing of benefits that typically follows a bankruptcy restructuring.

However, even if the bankruptcy filing goes through, it could be months before any official hearings take place. Citizens have already filed lawsuits citing that the governor cannot endorse the bankruptcy because it would cut public pensions, which are protected by Michigan's constitution.